ETSY Stock Study (6-16-23)

Posted by Mark on June 26, 2023 at 07:00 | Last modified: June 18, 2023 09:47

I recently did a stock study on Etsy, Inc. (ETSY) with a closing price of $95.97.

M* writes:

     > Etsy operates a top-10 e-commerce marketplace operator in the U.S.
     > and the U.K., with sizable operations in Germany, France, Australia,
     > and Canada. The firm dominates an interesting niche, connecting
     > buyers and sellers through its online market to exchange vintage
     > and craft goods. With $13.3 billion in 2022 consolidated gross
     > merchandise volume, the firm has cemented itself as one of the
     > largest players in a quickly growing space, generating revenue
     > from listing fees, commissions on sold items, advertising services,
     > payment processing, and shipping labels. As of the end of 2022, the
     > firm connected more than 95 million buyers and 7.5 million sellers
     > on its marketplace properties: Etsy, Reverb (musical equipment),
     > Elo7 (crafts in Brazil), and Depop (clothing resale).

This medium-size company has grown sales at an annualized rate of 40.8% over the past decade.

EPS are a bit more complicated. 2015 was the first year as a publicly-traded company. I am excluding ’13-’16 of negative/fractional EPS [otherwise resulting in an inflated growth rate] to start with $0.68/share in ’17. The company took a goodwill impairment charge of $1.0 billion in ’22 due to acquisitions Depop and Elo7. Per CFRA, this reduced EPS to -$5.48 from $4.61, which would preclude future growth rate projections. I am therefore excluding ’22 from the analysis to give a 60.0% p.a. growth rate since ’17. For ’17-’22, [sales and EPS] lines are mostly up and narrowing despite an EPS dip in ’18.

PTPM is above the industry but below peer averages while increasing from 7.3% in ’17 to 20.3% in ’21 with a last-5-year mean (excluding ’22) of 15.1%. ROE is above peer and industry averages while increasing from 23.8% in ’17 to 80.9% in ’22 with a last-5-year mean (excluding ’22) of 43.3%.

Debt-to-Capital has been above peer and industry averages since ’19 with a last-5-year mean of 76.5%. While this exceeds 100% in ’22, Value Line (giving a B+ rating for Financial Strength) is not concerned:

     > Although debt represented over 100% of capital at the end of 2022,
     > cash and short-term investments totaled $1.2 billion and the
     > company has only modest debt due over the next five years.
     > Additional funds can be sourced from the company’s $200 million
     > undrawn revolver and $29.1 million in long-term investments that
     > can be liquidated on short notice.

M* gives a Standard rating for Capital Allocation and is not concerned about debt either:

     > With our forecast for just 0.8 times average net leverage over
     > the next five years (net debt/adjusted EBITDA), a paucity of
     > near-term debt maturities, and a highly cash generative model…
     > balance sheet risk appears minimal for the marketplace operator.
     > We believe that Etsy should encounter no difficulties in funding
     > its investments in headcount and platform development with
     > internally generated funds, while retaining substantial
     > flexibility to invest in brand marketing and strategic
     > acquisitions. With no principal maturities until 2026, we view
     > Etsy’s balance sheet health as strong, despite the firm carrying
     > $2.3 billion in gross Etsy’s balance sheet debt as of the end of
     > the first quarter of 2023.

Quick Ratio is 2.5 and—nota bene—M* rates the company Wide for Economic Moat.

With regard to sales growth:

• CNN Business projects 7.7% YOY and 9.2% per year for ’23 and ’22-’24, respectively (based on 26 analysts).
• YF projects YOY 7.7% and 10.5% for ’23 and ’24, respectively (29 analysts).
• Zacks projects YOY 7.7% and 11.4% for ’23 and ’24, respectively (9).
• Value Line projects 11.9% annualized growth from ’22-’27.
• CFRA projects 9.0% YOY and 8.8% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 10.7% per year.

I am forecasting below the range at 7.0%.

With regard to EPS growth:

• CNN Business reports ACE of 22.6% YOY for ’24 (based on 26 analysts) along with 5-year annualized growth of 11.1%.
• MarketWatch projects 22.6% YOY and 19.1% per year for ’24 and ’23-’25, respectively (31 analysts).
• Nasdaq.com projects 19.6% and 27.8% per year for ’23-’25 and ’23-’26 [9, 7, and 1 analyst(s) for ’23, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 12.7%.
• YF projects YOY 144% and 29.9% for ’23 and ’24, respectively (24), along with 5-year annualized growth of 16.0%.
• Zacks projects YOY contraction of 13.6% and 23.0% growth for ’23 and ’24, respectively (9), along with 5-year annualized growth of 7.1%.
• Value Line projects 15.2% annualized growth from ’22-’27.
• CFRA projects 4.3% YOY and 10.4% per year for ’23 and ’22-’24, respectively, along with a 3-year CAGR of -3.0%.
• M* projects long-term annualized growth of 14.6%.

How YF comes up with 144% for ’23 with ’22 being a negative number is [unknown to me and] a moot point.

I am forecasting below the long-term-estimate range (mean of six: 12.8%) at 7.0%. My initial value of $3.40/share (’21 EPS) results in a calculated high EPS of $4.77. Using a -1.2% growth rate projected from ’22 trendline ($5.07) results in the same.

My Forecast High P/E is 35.0. High P/E has ranged from 32.1 in ’17 to 96.5 in ’19 with a last-5-year mean (’22 is NMF) of 89.1. The last-5-year-mean average P/E is 61.6. I am forecasting below the latter [and at the top of my comfort zone].

My Forecast Low P/E is 20.0. Low P/E has ranged from 13.8 in ’17 to 52.3 in ’19 with a last-5-year mean (’22 is NMF) of 34.0. The 5-year median is 27.4 (from ’18). I am forecasting toward the bottom of the range.

My Low Stock Price Forecast (LSPF) is the default of $68.00 based on the $3.40/share initial value. This is 29.1% less than the previous closing price and 1.5% above the 52-week low.

These inputs land ETSY in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 9.7%.

PAR (using Forecast Average—not High—P/E) is 5.3%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 72 studies over the past 90 days (my study and 14 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 16.3%, 15.0%, 50.0, and 25.6, respectively. I am lower on three and unable to compare EPS growth due to my initial value workaround. Value Line projects an average annual P/E of 35.0, which is lower than MS (37.8) and much higher than mine (27.5).

MS high and low EPS are $9.93/share and -$1.36/share versus my $4.77 and $3.40. MS data is—well, quite the mess! Over half the studies have low EPS below -$5.00/share. I would argue inclusion of a large one-time charge resulting in negative ’22 EPS to be unreasonable. Furthermore, some EPS growth rates above 400% per year are not filtered as outliers because the sample variance is so high. With a larger sample size, I might be able to manually exclude more studies in an effort to find more representative averages.

With outliers excluded, MS LSPF is $12.50 mean and $60.00 median. Here too, the hugely variant data and small sample size render MS unsuitable for comparison. This stems from the previous paragraph because the default equation, which most people will probably use, calculates LSPF based on those widely scattered low EPS numbers.

I consider ETSY a relatively cut-and-dried case: excluding ’22 (thereby nullifying ’22 growth) or normalizing ’22 by adding back the one-time charge (thereby including ’22 growth) would go a long way toward tidying up the MS dataset.

PEG ratio is another value check that I have recently begun to monitor. Zacks gives 40.8 / 7.1 ~ 5.8 compared to the generally accepted 1.0 – 1.5 upper limit. I’m not sure what EPS Zacks is using to get 40.8, but according to PEG the stock still looks quite expensive. In my early period tracking this metric, I have not seen many stocks below the 1.5 threshold. Granted we are now in a bull market, but I remain uncertain how useful PEG will be.

I feel like MOS is robust in this study based on my process of selecting conservative inputs at every turn relative to ranges and analyst estimates. I would look to re-evaluate the stock under $89/share.